CIO Market Update Audiocast Series​

Chris Hyzy:                Okay. Thanks, everybody, for joining this week’s Street Talk Call. Lots to discuss. As we have been discussing for the better part of the last three to six months as to where we are in this overall late cycle retest. To work out past, we’ve talked about wedges and we’ve talked about earnings deterioration not yet happening en masse. It is starting to pull through slightly. We’re going to talk a little bit about the path forward for the Federal Reserve. We had a 25-basis point hike yesterday, but more importantly, the communication in the presser was extremely important. We had hoped we would get more information as to the next couple of meetings. The word disinflation was uttered 13 times by Chair Powell, which I thought was pretty interesting there. Number two, we’re going to talk about the conundrums that are still developing in the markets and it’s why there is a great debate out there, “Have we run too far too fast? Did we miss the boat? Have we seen the lows? What about the mixed signals in October? Will we see those again in the spring? Once the Fed is done, what ultimately happens to the recessionary tone? Is it mild? Is it hard? Ultimately, have we passed that?” so there’s a lot of questions out there. Then ultimately, we have technicals and seasonal patterns that are pulling through and causing a lot of momentum in the market. We’ll point to some of those. Finally, what do we do? Where are we? What’s the type of balance that we need to strike between now and the end of the year in terms of the portfolio strategy? So, with that as a backdrop, we’re going to discuss a lot of numbers today.

                                    First and foremost, let’s talk about the Federal Reserve and the communication yesterday. They bumped up rates, as we’ve already discussed, 25 basis points which is down from their pattern which was 50 and before that 75 in the previous meetings; virtually every meeting since March of last year. Now there’s a lot of questions as to, “What do they do in March and what do they do in May?” Given the communication, some believe they pause at the March meeting with another 25-basis point hike. Still others, including our B of A Research Global Economics team, still see two more hikes of 25 in March and then 25 in May, but risk on the table is that they do pause and they do not go forward in May because we’re going to get more employment data out. We’re going to skip a meeting. Obviously, there’s no meeting in April. We’ll get another data coming out with wages, jobs, personal consumption expenditures, CPI, PPI, and more economic data well ahead of the May meeting. As we mentioned before, they used the word disinflation. It was used 13 times. That had not been used before. This is something that we had expected - not necessarily the word but in terms of the trend. Just to point to a few things right now. If you take a look at the Fed’s preferred measure, the personal consumption expenditures, is tracking 2%. Not a lot of people are digging into this data and looking at this right now. They’re still looking at the overall month to month move and they’re not really looking at the last three month or six-month annualized trend, and those trends are suggesting that we’re tracking 2%. The Fed has long said that their average inflation target is 2%. The personal consumption expenditure now is at about 2.1% again, on a three-month annualized basis. That’s down from 5% virtually last year. Now when you take a look at the core PCE, it’s less noisy, stickier. It’s averaging about 2.9% in the last three months. So the tightening of financial conditions last year before October are feeding into the data now. You could argue that financial conditions – the weaker dollar, risk on move in January in stocks, yields coming down, copper rallying, gold rallying, some other areas performing better within the stock market, and even in the face of slowing money growth, if not negative money growth, you could argue the financial conditions around the world have actually increased or gotten weaker and better overall for risk assets since October; when I say weaker, not necessarily weak but certainly easier. Having said all that, the Federal Reserve did note this, “We are not concerned by short term financial conditions.” So again, they used disinflation. They said, “We’re not concerned about short term financial conditions,” and if you roll that all up, you can argue that those were very dovish tones coming out of the Fed that was expected to be very - at least in words - very hawkish but the data, as they’ve always said, is going to dictate their path forward. So, we’ve got a few more months of jobs, few more months of PCE and CPI and PPI and a number of other economic gauges. It is our belief ultimately the Fed pause happens before we get well into the spring. If that does happen, then the true wedge in the markets, at least in our opinion, continues to be the job market even in the face of a pause by the Fed. The other wedge that we will likely talk about is once the jobs data starts to show that there are more cracks - not just in tech, but more cracks. What is the Fed watching? They’re watching the quit rate relative overall to the job opportunities, if you will. So, if you take a look at the quit rate relative to layoffs, it’s another gauge that the Fed is watching. If quit rate goes up and layoffs go up, there’s nothing in the data that would spook them, but if layoffs go up and the quit rate goes down, obviously that’s an indication that the trend is going against solid jobs numbers and ultimately, that could produce a pause sooner rather than later. I don’t want to mix too much data in here and too many types of statements, but the bottom line is the Fed was dovish yesterday in their tone. They hiked 25 basis points. Expect another 25 in March. We skip April and we get to May and the data will likely dictate whether or not they pause in March or move again in 25. Either way, the terminal rate is somewhere around 4.75% - they’ve said this - and 5%, give or take a range 5% - 5.25%. So it’s not the cost of capital, it’s actually the balance sheet. We’ve long said that. If money growth continues to be negative, then we should see slower and slower growth for the rest of the year.

                                    Now, are investors looking through this? One of the risks going into this year is that the investor, the collective investor around the world, putting capital to work knowing the environment we’re in financially from a capital markets perspective and an economic perspective. Is the investor looking through this year already? Most investors place capital across the marketplace across the world thinking in yearly terms - in other words three, four, five years out - particularly as it relates to individual investments because of thinking about the profit cycle, but shorter-term investors typically begin to discount the next year at the halfway point of the year before. Is that happening quicker this time because of distortions? Because of the pandemic cycle, it’s different this time because of now the Federal Reserve engineer with QT plus higher rates, but yet earnings and the consumer and corporations are hanging in there better than expected. Is the investor looking through this lens and already beginning to discount a better ‘24 and not caring as much as they typically do at this stage of the game for the year they’re in? It is quite likely that’s the case. Let’s run through the numbers. What are the conundrums in the market? Take a look at the semiconductor arena - very cyclical. Global economic growth dictates the semi cycle. Semis, for the past month of January, have been leading this market forward by a factor of threefold. The discretionary also leading. Two areas that rely on better growth or at least the end of the weakness cycle and they’re looking through the lens and discounting a much better growth picture. Is that happening sooner rather than later? Now when you take a look at the overall equity market, the equity market doesn’t believe the Fed right now. It doesn’t believe that the Fed is going to stay higher for longer. The equity market is factoring in cuts by the end of the year as evidenced by what is leading in the market. The bond market’s doing the same thing. Fed funds futures are now discounting 50 basis points or a little over that. At the tail end of the year - cuts. Two-year yields are 70 basis points below the Fed funds rate. So, the bond market doesn’t believe the Fed either, but stocks and bonds don’t believe each other. They don’t agree with each other. If you take a look at now stocks are now above 4100 as evidenced by the S&P 500 index only. The equal weighted index is doing better overall in the past year relative to the market cap weighted index, but right now in the S&P 500 the market cap weighted index is above 4100 while the yield curve is deeply inverted. So a deeply inverted yield curve, the two year yield 70 basis points below the Fed funds, and stocks now above 4100 with semiconductors and discretionary stocks leading the way. This is unnatural. The last time you had a deeply inverted yield curve this deep and stocks rallied this aggressively off their lows from 25% from the October lows of say 3490 on the S&P give or take was 1979 and then between 2006 and mid-2007 when the S&P rallied 25% off its lows. If you go 25% off the lows of 3490, in today’s terms that moves the index, the S&P 500, to 4350. That’s not the target. These are just technical structural factors that if similar patterns hold as the last time we had a deeply inverted curve and stocks rallied this aggressively off their lows on average about 25%, it could take the S&P 500 to 4250. Now having said all that, if you look at technical analysis, a lot of technicians believe that the next resistance is 4325. That is not our expertise here in CIO, but with the momentum taking us above 4100, a lot of technicians are pointing to further upside overall.

                                    As it relates to another conundrum in the marketplace, let’s talk about the VIX, basically the Chicago Board Options Exchange Volatility Index. Some call it the fear gauge, but the VIX is at a 52-week low. It’s been trending lower. It’s been below 20 now for quite some time and it’s trending well below that as we speak but this is happening while key economic gauges are in contraction particularly in the United States. Gold is back to its April highs and showing very little signs of peaking out. At this point even though gold has been strong relatively recently, if you go back over the last 12 months and particularly since October, it’s been outperforming equities and fixed income, so another conundrum in the market. I should say equities as it relates to S&P 500 and the Nasdaq. Now you take a look at another conundrum, copper outperforming crude. So things are noisy right now. The market is a grind. It’s trying to figure out what is that next phase. Is the late cycle peaking? Is it peaking too early? The deeply inverted yield curve, equities rally, the fear gauge at its low point in the last 12 months and below 20 now consistently, gold at its April highs, the dollar weaker, non-US markets outperforming US. It’s a difficult environment. Having said all that, because sentiment is so poor still and the average allocation out there is still below - at least from our data - below what typical equity investors have and you’ve got yields attractive at the front end of the yield curve, you’ve got a lot of now new balanced portfolios, i.e. 60%/40%, 60% stocks, 40% bond portfolios, outperforming again, somewhere around the 6% level on both of those; one of the more aggressive moves that we have seen in a long, long time to start the year.

                                    So, let’s talk a little bit more about [Naq]. Now, according to our technical analysis department B of A Research, Steve Suttmeier’s work, the S&P 500 is up about 6.18% in January. If you go back to 1928 when January is up/when January is positive, the year is up almost 80% of the time; about 79% of the time going back in 1928. The average return in those years in which January is up is somewhere around 13%. Again, using the S&P 500. Now, if you look at similar data in all of this and you use fund strat research’s data, just going literally back when we go back to the first four days of January. When the first four days of January are up 1.4%, January is up on a positive tone and we’re coming off a negative year like we had. That’s been seven times that we’ve seen that happen. From the fifth day through the first half of the year, according to fund strat research going back to 1950, the median gain has been of about 9.5% for the first half from the fifth day through the first half. The full year median gain when this happened was approximately 26% and they had a range of 13% - 38%. The point here is this, when you’re coming off a negative year and the first four days of January were up greater than 1.4% - which has happened seven times since 1950 - they all produced a positive gain in that full year. The full year median gain was somewhere around 26%. Again, time will tell. This time around things tend to be different every once in a while particularly coming off the pandemic cycle, but if you’re looking at pure history, if you’re looking at some of the technical data out there, the momentum has been traditionally in favor of the equity investor. The two most recent times we saw this were 2012 and 2019.

                                    Now finally going back to B of A Research Global Technical Analysis team research, using similar type of analysis going back to 1928 - just using the first five days instead of the first four days - the first five days of January - some used that - and January’s positive going back to 1928. This has happened 46 times. Almost 83% of the time the year is positive with an average gain of 14.6%. So, a lot of numbers. Apologize for that, but technical analysis, momentum, some historical data about what January tells us about the rest of the year seems to be in favor of the equity investor at this stage. We have a lot of work to do yet. What’s the work to do? We have to get a clearer picture on earnings. So far earnings 40% of the S&P 500 overall reporting about 1% gain on revenues. As far as we can tell right now relative to expectations, somewhere between 3% and 4% gain. Earnings however a little different picture - about flat, maybe up 0.5% if you run the data out. We’ll see how that goes. It’s relatively in line with what consensus was looking for, so that big earnings deterioration has not happened yet. What we haven’t seen yet, which is typically a good sign to suggest that the overall lows are in traditionally, is when estimate revisions begin to turn up the other way and you get more positive revisions relative to negative. We haven’t seen that yet. We’ll be looking at that research closely in the coming quarters.

                                    We do believe that overall from a portfolio strategy standpoint, first and foremost, the Fed needs to pause. Secondarily, financial conditions need to stay relatively easy. While that’s happening, earnings not deteriorate as much, and overall sentiment begins to look for signs that overall October bottoms are in. What gives us those signs? The leading economic indicators need to bottom out. We haven’t seen that yet. So of course this could be different this time. This could be a different type of cycle. We think there’s components of this cycle that are different, so this is why we are neutral at this stage equities relative to fixed income. We believe that the 60/40 so called portfolio has been resurrected. It’s not just a January phenomenon. We think that ultimately the full year of this year, in a balanced way, in a moderate way, in a grind it out way neutral stocks, natural bonds to begin and then ultimately - as we work through this and we work through the noise - ultimately allow your targeted asset allocation to work for you and then underneath that we are of the high conviction that underneath asset allocation is where so-called excess return opportunities are - large caps relative to small caps, value relative to growth, US relative to non-US, developed markets relative to emerging markets, etc.. Not so much here or there on the sector side, but certainly if it’s level two or sub-asset class level. So, we are neutral stocks relative to bonds. On our watch list for potential increase in favorability continues to be small caps and continues to be non-US. Over the course of the next two to three months as we get closer and closer to a Fed pause, it is our belief that the dollar has a higher conviction level to continue its weaker path which could support the multinational earnings and could support a dollar- based investor in non-US markets therefore those areas continue to be on our potential increase in favorability list. So more to combat tactical asset allocation in future calls. For now, it’s a grind it out. We’ll take this momentum. Technicals are on our side at this point and we’re looking for signs that the leading economic indicators are bottoming. That’ll do it for today’s upfront comments. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.

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Chris Hyzy:                This is Chris Hyzy, Chief Investment Officer, for the January 30^th Market Update. We start off by asking one question on this update, “Why is everyone downplaying the latest rally in the equity markets?” We point to a few things. First and foremost, liquidity. There’s still concerns out there that the bond market’s liquidity isn’t at its level that it normally is as it relates to an overall vacuum that some are discussing in the marketplace. This could be due to continued concerns about the raising of the debt ceiling. It could also be to the fact that the two largest traditional buyers at least recently in the market - the Federal Reserve and China - have backed away. Nonetheless, the massive inversion of the yield curve, particularly between the front end and the back end, as it relates to the two to 10-year spread and the drying up of some liquidity in the market is still a big concern on the part of investors. Number two, investors also point to the concern over money supply, which has some elements of liquidity to it, but the money supply, overall money in circulation in checking and deposit and savings accounts and money market funds overall collectively is contracting first time since the data has been collected in over seven decades. So, when we take a look at those two - big concerns. Another reason why everyone is downplaying the latest rally to start the year is earnings deterioration has yet to be reflected. In fact, investors rallying this market right now are starting to possibly look through that. We know that earnings overall bottom after the market bottoms, but still it remains to be seen coming out of these earnings announcements exactly what is the path forward, so that’s another concern in the marketplace. Valuation is another one. Most people say it’s still not low enough. They point to below 15 times earnings and they’re also pointing to where we are right now, which is about 17 - 18 times earnings on a go forward basis. If you get earnings deterioration more than expected, they point to the fact that valuation could actually go up before it starts to ultimately bottom out. Last but not least, two more that are out there - should three more. China, the reopening is great but lumpy and then geopolitics still a major concern. Finally, they point to two other ones I guess on a secondary basis - that wage growth is still sticky and even though inflation is coming down, the worries are still there that wage growth would remain at an attractive level, keeping the Fed pumping on the brakes. The tech rally that we’ve seen recently, they’re pushing that off to the side. Overall believing that tech earnings deterioration has yet to happen and if that happens, that could overhang on the market but we simply ask another question, “What if the market started to factor most of this in last year when we hit the lows three or four times throughout the year, somewhere around 3,500 or so on the S&P 500?” We sit about over 4,000 right now or just at the 4,000 level coming off of the high which was over 4,700. We had a peak to troth move of 25% from the high to the low and now we’re just grinding it out, which is what we expect for most of this year, is a grind it out type of marketplace trying to figure out the final reset but when we think about last year when we hit those lows, obviously a lot of hard work to do but that’s when most of the economic data, at least in our opinion, and the data that the Fed was watching was at its most concerning time and most concerning levels. Inflation at its highest level. Valuations in the 20s, not around 17 or 18. War still overall affecting at its highest impact point. Supply chain - most of it still being very much distorted. So, what if things are generally simply better right now? Even in the face of this final reset, what if investors are actually looking through this and out to the other side? It still seems a little bit early to do that but we still ask the question because oil and gas prices are significantly down, particularly in Europe; one of the reasons why Europe equity markets are significantly outperforming. Inflation - sharply lower and heading lower in the right direction. The Fed close to its ending of its tightening campaign. Valuation some 20% lower. Curve inversion still very, very major but suggesting that the front end could come down by the end of the year. We will see on that. Europe, as we already said, much better off. China reopening - yes, lumpy but still reopening. We didn’t have that last year. So maybe, just maybe, investors are looking through the final point of this reset and the final point of the storm on to much brighter skies or at least subtly brighter skies. We will find out this week a lot more to major answers - obviously, earnings, big earnings week this week and then the Federal Reserve Open Market Committee meeting final meeting and communication coming out on Wednesday. We expected 25 basis point hike, but that’s yesterday’s story. Tomorrow’s story will be more about, “What is the path forward?” That’ll do it for today. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.

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Chris Hyzy:                Hey. Thanks, everyone, for joining this week’s Street Talk Call which is actually in between our two Viewpoints, the one that we already released for January and then the upcoming February one. So much of the discussion upfront today is a general mixed bag about what’s going on in the economy, what’s going on in the capital markets, our reasoning for the rally to start the year, what we believe is coming down around the corner. One of the clues to all of this is the general mixed tone that's happening in terms of what is leading in the markets to start the year and what is lagging. So, we want to talk about the rally, we want to talk about this concept called the mixer, and then ultimately how that segues into what we believe is in the oven. So, all of these things we'll talk about in the context of where we see capital markets going and how to deal with it as it relates to portfolio strategy and enveloping all of this, at least in our opinion, is it's different this time. It's not necessarily all historical references given the fact that we're in late cycle. It's not about what credit spreads are telling us. It's not about what the fed’s communication is about to say. It's not necessarily about the differences between Europe, Asia, and the United States. It’s not generally about what the employment markets are telling us. It's about everything. This time around we have mixed signals that are much more expanded in our opinion because the pandemic cycle was very different. The response to the pandemic cycle was very, very different. We've long discussed this concept of the last time that collectively we had a response to fund something this heavy and that was World War II. So, most of what we are trying to ascertain and look for coming out of this late cycle cyclical bear market into the bridge period of recession and then out of it is not just earnings deterioration of the yield curve or the fed as we said before. It’s about various components that are more akin to this cycle, more akin to this economy both US and globally, more akin to how the yield curve works nowadays versus prior periods. It is our belief that we will be in a longer, confusing, more complex workout in the markets as it relates to what they're telling us. Therefore, it's important to digest this rally, “Why did it happen? How long it can continue? What's driving it? Ultimately, what can reverse it?” - number one. Number two, we talked about this concept of the mixer. You can have a ton of ingredients out there that you can examine one by one. That's great. That's interesting but the mixer can aggregate that all together and tell you a very different picture and that's generally speaking what the markets are telling us right now. Then finally, if you are going to create some batter, “How long is it in the oven? How does it come out? What temperature is the oven set at? How long can we deal with that?”

                                    So, let's start with the rally. Financial conditions have clearly eased since October. Noticeably. Namely when you take a look at the long rates, overall fed’s communications, inflation, the dollar, reopening in China. All of this started to occur, for the most part collectively give or take, since October, but really gathered momentum at the tail end of December into this year. The direction and magnitude of things like inflation, the global economy, the labor market, central banks, and obviously external concerns have all been in the favor of a relief rally to the upside that has been driven primarily by again, financial conditions easing at least right now but really, we see it as liquidity. So first and foremost, the biggest wedge last year in the markets for most of the year was inflation. There was references to 40 year highs, references to, “Here we go, the 1970s are all over again,”, “the supply chain will never get fixed,” Wage price spirals continue, the labor pool is very low, the demand for labor is very high, we have goods spending switching to services spending, we have pricing power that's going to last, and most of that is unwinding. There's this also realization now that money, money growth in particular or money supply, is the catalyst to inflation. Most still don't believe that. In fact, some policymakers are still pointing to wage growth as the underlying basis of inflation primarily. It's a component thereof, but not necessarily the underlying driver, at least not in our opinion. If there is more money to do things with, particularly if it's over and above the level of inflation, it can continue to drive inflation both in the short and long run. How that filters into the broader economy is a whole other question and how that leads to sticky inflation is a whole other question, but simple thought process here - if you expand the money supply greatly to the level that we have, both in the United States and globally, inflation becomes an issue and then when you start to contract that money supply - right now inflation is coming down not necessarily because wage growth has stopped going up at the level it did last year, but it's coming down across the board because there's less money to do things with and there's less confidence in the growth of the general level of the economy and that creates a more conservative tone overall in things like spending, the ability to take risk, to raise wages overall even though the supply of labor still low and demand for it is still high. All of this leads us to say the single most important aspect to the direction of inflation and its magnitude is still the money supply. The money supply is now contracting and that leads us to believe that one of the greatest surprises in the next 18 months could be how far inflation falls. We’ve said that before, but it is now the story that is being picked up in the marketplace. It's one of the reasons why long rates are coming down and have come down to a level that most expected to happen later in the year and we haven't even hit the recessionary tones yet. So first and foremost, direction and magnitude matters. The rally is pointing to the wedge. First wedge - inflation - is gone. The inflation wedge is out of the markets. There's a new wedge. We'll talk about that in a second. The second level to look at is rates. We've talked about it. Short rates are high. Short rates are providing yield at the front end of the curve. The fed is not done hiking. B of A Global Research still expects 25 - or now expects 25 for February from the original forecast of 50 - bump up to short rates. Another 25 in March and now a 25 in May because it is their belief that overall, the US economy, which was originally expected to enter some level of recession early this year, has now been pushed out to the second quarter. Again, it's different this time.

                                    Now, let's switch over to what's going on outside the United States. China reopening is providing a tailwind. It could also be one of the reasons why the global economy and the US economy is stalled out on moving into a recession, but it's certainly a major reason why the European economy/European stock markets are outperforming the developed stock markets including the US and have been since the reopening has occurred and that also is combined with a major tailwind as it relates to expectations of where we are in oil and gas prices relative to where we were with the biggest fears being a major move higher into a very tough winter for Europe. That has not materialized. Those are the two big tailwinds to the European economy/the European markets which are inherently more value and also more exposed to things like metals and mining and areas that have been generally leading the markets. So overall, you can check the box direction and magnitude of inflation’s going in favor right now of easier financial conditions, less need for the fed to tighten further. Nonetheless, money supply is contracting and that is very pressurized to the level of inflation. We could be talking about negative inflation within 18 months or sooner if they continue to tighten conditions aggressively both at the balance sheet level reserves and overall, the cost of capital.

                                    Let’s shift over to labor market. That's the new wedge. We've talked about this before. Why is that a wedge? Well because that's providing the hands to open the window that the fed still sees as a reason to hike. So, if the labor markets provide us a reason to get more worried, central banks will get more worried and potentially pause before that last hike in May. Right now, the signs that are showing cracking is mostly in the technology space, but we rolled up all of the layoffs in technology, at least in the big mega technology names, and we don't even get above 400,000 at least it was announced. Four hundred thousand layoffs is tough for those individuals but overall where we are in the grand scheme of things in the labor market, it's small. So, we haven't seen this happen across. Slightly in the financial sector, some parts of consumer discretionary, but overall, the labor market is a wedge for this reason. It provides the opportunity for the Federal Reserve in particular to still put their foot on the brakes thinking that wage growth will continue to be high and overall or potentially reignite later in the year. We don't believe that the labor market is showing signs of a re-acceleration. We believe that the labor market is beginning its trend to the negative side of the equation, adding to our belief across the firm, particularly from global research, that a recession - at least if not already started - is about to start in the second quarter. Central banks - another thing to watch. ECB, European Central Bank, likely to be more hawkish, believe it or not, than the Federal Reserve. Part timing, part reasons around in how inflation feeds through into Europe, but overall, that should widen or at least narrow interest rate differentials between the US and Europe. Ultimately, that has a counterintuitive effect on the euro versus the dollar across. So, the euro should strengthen, and the dollar could weaken further versus that area, underpinning the support for the European equity markets further. It is our belief that that should slow down before it picks up again, but it is still a trend that we think is gathering momentum. The Bank of Japan backed off on full yield curve control at least for now in terms of allowing significant increases in their yield ranges. We think that that's just a stalled-out method right now. Part of it has to do with the handoff from one official to the next, but what we think that that's going to continue. Bank of China - easing conditions in conjunction with its reopening as well. So, all of this is lending itself generally speaking to a mixed bag from central banks, but still on the hawkish tone overall except for the Bank of China.

                                    External concerns. The debt ceiling is now creeping in and a lot of talk around that. Watch the narrow House majority here. It's very different than 2011 when there was a much wider, stronger, higher majority. There's also a very different makeup in congress right now. Most political strategists believe that it would be very difficult ultimately to not do the right thing, which is to raise the debt ceiling and it could potentially obviously go to the last minute here. We're used to that. It's a very big concern. It is something to watch but overall, we believe that ultimately that gets fixed. Last but not least, tech regulation is out there and the extended war in Ukraine continues. Tech regulation, we've seen this before. It comes and goes. The drumbeat is getting louder there therefore we don't think this rally in technology land has much legs further than this quarter.

                                    So put all of this in the mixer and what do you get? It is our view that we get pretty good batter. We get a delayed recession, we get easier financial conditions, we get narrowing of interest rate differentials, we get credit spreads that are still tame. You’ve looked at the individual ingredients and you could poke a story there any way you want. You could look at negative ingredients and you can look at subtle positive ingredients and when you put it all together, again, a pretty good batter for now. So, risk assets are up. The S&P's up 5% or so to start the year, NASDAQ is up 9%, the Dow much less than that because of the price weighted components there of some individual names - Dows up 2%, the S&P we already mentioned, Europe up 11% in dollar terms, China - depending on the index - up 8% to 14% leading the world, Hong Kong up 13%, Japan up 5% give or take to start the year. Credit spreads generally tame and narrow mostly because investors look at corporate health and they don't see a very difficult recession coming. They also see most of the pain in technology land which happens to have clean balance sheets, less debt load, and more cash. That's one of the reasons, at least in our opinion, why credit spreads are where they're at. So put it all again in worries over the major turndown in the employment market - not there yet. Major turn down in commercial real estate - not there. Economic growth slowing - yes, but still the waiting game on the most telegraphed recession, at least we believe, ever that we've seen in our time - not there yet. Earnings deterioration - yes, happening, but it's targeted right now. It seems to be in some parts of discretionary. Obviously in tech land, but it's not across the board yet. We are seeing signs that revenues are slowing down. Pricing power is going away. The next shoe to drop is going to be how much do unit volumes drop? If you get less pricing power, lower prices, lower volumes, that feeds into more earnings deterioration. Again, down 9%, down 10% is the forecast from B of A Global Research at this point.

                                    So, what's in the oven? Again, recession timeline is delayed. It's pushed out. How big or small is the recession? Still feel a mild one. Is it an earnings recession? Yes. What does that mean? That means a downdraft in earnings. Again, the magnitude is going to be the key here. At this point, down 10%. Not your classic recession, which is down double that or more. If we go down double that or more, then it is our belief that the fed stays higher for longer, continues to contract the balance sheet, and adds a major turn down in pricing power mixed with unit volume growth that could lead into a tougher earnings season than we currently expect. Equity markets are viewing right now. Overall, the batter as a soft landing. Bond markets are viewing the batter that a recession is coming.

                                    So, what do we look at? We’re looking at gold here. Gold is up 10% year to date largely with the tailwind being the weaker dollar, but also as a hedge on what's going on around the world and the confusing signals coming from liquidity. Liquidity in the market - let's talk about that. Liquidity in the markets - there's a way to express liquidity and then there's another way to think about expressing liquidity. From our perspective, the best way to look at liquidity is what's happening in the bond markets, what's happening in what the Treasury is issuing, what's happening in what they call the Treasury General Account, and what's happening in reserves. That, at least our belief, is one of the better ways to look at liquidity that's available for the markets whether to invest, whether to hedge, or whether to simply smooth out volatility. Right now, the liquidity, as far as we can see in the Treasury General Account, typically $900 billion has been drawn down to about $300 billion. That's $600 billion out there extra to provide liquidity into the capital markets. That is generally of the worries that are out there over the debt ceiling and how to pay for it overall in terms of bill payments. As we move closer and closer to the drop-dead date - at least many people believe that is post spring, maybe perhaps early June - when your back is against the wall, you need to start to raise the debt ceiling once and for all. It could be that the debt ceiling gets raised. We move on. There's a positive viewpoint in the marketplace, but then what the Treasury General Account would have to do would have to be re-liquefied. It'd have to be going back up from $300 billion to a more normal level and if that occurs, it’s likely that liquidity comes down. So, it's actually a counterintuitive way to think about a positive event in terms of getting a concern out of the markets but ultimately its effect on the reserve base could be tighter financial conditions precisely at a time when earnings deterioration begins to happen more visibly. So we're watching that very, very closely and that could be the next time in which the markets exhale and that could also be a large opportunity to rebalance portfolios back into the areas of upward drifting risk like equities. We'll be watching that closely. So, rebalancing could happen in a larger way closer to the middle part of the year for long term investors.

                                    Finally, what's in the oven and what's baking? Well, the dollar has peaked. Two-year yields have peaked. The employment slowdown overall is starting to show some signs of filtering into other non-tech areas but not in large mass. Liquidity we already talked about that. Finally, technicals. When you start the year with a rally of 5%, you're almost closing out the month of January and your first five days are also positive, you generally have a positive historical effect on the full year. We have long said that it's potentially different this time but we're looking at technicals right now in favor of the equity investor, particularly when you come off of a negative year and a negative year that was in the double digits. When you look at negative years, you shift to positive for the first five days, you shift to positive for the month of January, you generally have had a sizably solid year that next year. So technicals - in favor. Liquidity – right now in favor but liquidity’s about to shift. The batter looks overall pretty decent right now. The oven is baking. Here’s one caution overall which is why we need to watch this temperature very, very closely. The leaders in the latest move up in the market and the laggards are telling us very mixed results. Tech is going through a relief rally. Semis have powered this. Most of it’s because of an exhale from tax loss harvesting selling last year but it’s also generally speaking because earnings were not as bad but also the layoffs have been announced in technology are what investors were looking for, that their seriousness as it relates to holding margins in there, but we still believe that there’s more of a relief rally than actual the technology sector has turned completely for the better. Healthcare is up. More of a defensive tone. Generally higher quality in some areas providing yield and a little bit of growth. Makes sense. Thrifts and mortgages are down. Although mortgage rates are down, the belief there, at least in our opinion, is the inverted yield curve. Rails. Rails have rolled over – traditional, very cyclical. Late cycle relief rallies tend to not include the rails going down. Usually, they start to hold the line and then start to turn more positive. This time around the rails are obviously pointing to the fed, which is not showing any signs that they're going to cut any time soon. Emerging markets up - that’s a dollar play but also a commodity relief exposure overall and obviously, China's reopening which is a heavy part of the index. Steel also up. Very interesting there given the housing situation, but likely because of China's reopening. Then ultimately discretionary sector is far outpacing the staples sector which tends to be a little bit higher quality, less cyclical.

                                    So mixed bag overall, which is why all of this leads us to stay neutral. We started out the year neutral across the board in fixed income and equity, expecting a mixed bag to continue. We're going to continue to wait for concrete signs that the oven is baking the batter to a better temperature and we’re going to point to things like again, liquidity, the leading economic indicators driven by the Institute for Supply Management and purchasing managers indices. Those are the ones that we'll look to first. The yield curve is most important and spreads. Secondary is earnings and estimate revisions because ultimately that bottoms after the market finally bottoms. We expect another rebalancing opportunity in the next few months and a long-term bull market to begin some time around the turn of the year into 2024 pointing to better earnings outlook from the trough that we expect in 2023. We'll use the short end of the curve for cash flow, the long end of the curve for total return. We'll use equities for long term growth and we're going to continue to emphasize value and higher quality. We want to be diversified across sectors, namely industrials, healthcare, and energy; areas that are still generally exhibiting better estimate revisions and then finally, we want to keep emerging markets, non-US equities overall in small caps on our upgrade watch list once we feel the turn has stronger legs. We're not there yet, but we're getting closer. With that, that’ll do it for upfront comments for today.

Operator:                   Please see important disclosures provided on this page.

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